Surviving a market downturn

Market downturns are often known as “bear markets” and it’s arguably not a bad term.  Bears are big, dangerous creatures and if you know they’re around, then it makes sense to tread carefully.  With that in mind, here are five tips for surviving a market downturn.

Check your emotions at the door

If you ever need to exit a location in an emergency, then you generally want to do so in an orderly fashion, panicking is highly unlikely to help, in fact, panic is usually best avoided at all costs.  At the end of the day, investing is basically a combination of hard numbers and human judgement and you will be best placed to exercise good judgement if you keep your head clear.

Always stay alert to opportunity

Market downturns can punish the stock prices of companies with excellent fundamentals and long-term prospects, which means that those who can master their own fears may be able to pick up bargains while other people high-tail it for the exits.  If a company has good management, robust financials and a desirable product or service which people are going to need into the future, then there is a very good chance it’s a great buy even if its share price is heading south, indeed, you might even say, especially when its share price is heading south.

Remember the importance of liquidity

Investment funds are supposed to be funds you can afford to lose.  We all know, in principle, that the value of any asset can go down as well as up, especially in a market downturn.  We also know that, in principle, any investment could become worthless, taking our investment capital and leaving us with nothing.  That’s the difference between investment and lending.  When the general market trend is upwards, it may be acceptable to put a bit more of your overall value into shares than, strictly speaking, you should, because there is a good chance that if you need to sell, somebody else will be happy to buy and you will, at least, get your capital back (or close enough).  That, however, is not necessarily the case in a market downturn, so think carefully about how much cash or near cash you really need to have for the foreseeable future and, if necessary, liquidate some of your investments in an orderly way to ensure that you have that cash/near cash, ready to hand if you need it.

Keep the principle of diversification in mind

Per the above point, you may want to rebalance your portfolio somewhat to give yourself a bit of room to maneuver in a difficult market.  The key word in that sentence, however, is “balance”.  You still want to keep your portfolio appropriately diversified.  In fact, you could even argue that the need for diversification is even stronger in a market downturn, since you have a higher risk of one or more of your investments failing to perform as well as you had expected.

Resist the temptation to become greedy

Market downturns can be superb buying opportunities for investors who can see past the “doom-and-gloom” headlines and into the real fundamentals of any given company.  While it’s true that grabbing bargains in bear markets can set you up for long-term investing success, the fact still remains that you will only survive into the long term if you make it past the short term first.  That means you still need to make sure you can make essential payments like mortgages, utility bills, grocery purchases, taxes and any other financial commitments and you have to be able to continue to do so, even if you become unemployed for any period.  Keep this in mind at all times.